First Data is set to go private by year’s end. This is a huge deal for our industry and one which I think suggests that changes are coming to the acquiring business and the ISO space in particular. The financial guys behind these deals are very smart people. They are convinced that they can buy the company, fix a few things, maybe sell a division or two and then, in 5 years or so, sell it again to the public at a much higher price. Given the track record the private equity firms have, I would say it’s likely that they will succeed.
    These transactions are two more of a string of recent privatizations in the acquiring industry – iPayments recently took itself private in a management-lead buyout. The only two firms left on the public market are Heartland and Global. Will one of them be next? Perhaps NOVA will spin out of US Bank, just as Metavante has agreed to do. You can bet the calculators in New York running the numbers right now.
    These ownership changes, largely backed by private equity investors represent a new thing for our industry. Parsing out what it means for merchants, ISO’s and the acquiring industry is tough. My comments are focused on the acquiring side of the business, and I certainly have no inside knowledge, but the following ideas seem like possibilities to me.

Acquired Companies Will Be Tied Up For a Year.

    It’s a pretty safe bet that any major ownership change will consume the time and attention of the company’s management for the remainder of this year and possibly into next. This is a huge change for any company, and it inevitably causes confusion. Add to that the possibility of layoffs, division sales and restructurings and you get a recipe for company management to take their eye off the ball. It’s almost impossible not to.

Acquired Companies Can’t Be Price Leaders - at least not right away.

    These transactions are done with a huge amount of debt. The burden of that much leverage means that the company is sensitive to any margin compression. That lowers the chances they will lead with a low price strategy. In the near term, look for management to resist falling prices any way they can to preserve operating cash flows.

Look for Platform Consolidation.

    First Data Merchant Services has long processed on a variety of platforms. With margins under pressure due to falling prices in the market, it seems likely to me that FDMS would want to consolidate platforms onto newer, lower cost technology. This is a long project and one the public markets, which are relentlessly focused on quarterly results, would not tolerate well. If a conversion causes a great deal of disruption to merchants, there could be significant loss of customers (especially small ones) and possibly frustrated ISO’s as well. However, at the end of the conversion, look for FDMS to be the leader in technology and cost. Long term – FDMS sustains short term pain to emerge as a winner.

Look For Spin Offs of Slow Growing Divisions.

    FDR has a number of divisions which are slow growers – domestic acquiring among them. It would not surprise me if they chose to sell off one or more businesses if the pricing were right. Imagine for example, a large foreign bank which might want a US processing presence as a means of entry to the US commercial banking market. (Royal Bank of Scotland’s acquisition of Lynk merchant services comes to mind as a recent example.) The fact that the acquiring business is slow growing would not matter a great deal to the buyer since they would no doubt base their decision on the economics of offering a wide variety of banking services to FDMS’s customer base such as loans, treasury and other financial functions. A large bank could use processing as a lead product around which to build the relationship. If this happens, it could be a real game-changer for the acquiring business since it could introduce a broad-based, low-price strategy to the market.

Emphasize International.

    Virtually every major player in the market is emphasizing their international expansion strategy. Conversely, that means they are not emphasizing their domestic strategy. That means the majors will be honing their sales approach to minimize costs of customer acquisition and maximize cash flow. If the ISO channel can enable that objective, then the ISO channel will be rewarded. If ISO’s can’t do that, they will be de-emphasized. How ISO’s choose to fit into the needs of acquirers is a challenge that is up to ISO’s. Acquirers have choices for how to grow their domestic businesses and ISO’s are just one.

    These are just a few speculative ideas about what a change of ownership at leading companies in our industry might mean for the acquiring business. I welcome your ideas on the topic – email them to me. We’ll see what really happens, but one thing is for sure, you can bet that a change in ownership means more changes to come.

Harold Montgomery is the CEO of Calpian, Inc., a Dallas, Texas based provider of financing opportunities to all levels of merchant acquirers. You can contact Harold at 800.589.1173 or portfolio@calpian.com.